The Ultimatum Game (Discrete)

This lecture solves the simplest version of the ultimatum game. We find that those who can propose offers hold substantial bargaining leverage over their opponents.

Takeaway Points

If a single person makes a take-it-or-leave-it offer, he has no incentive to give a large share of the surplus to his partner.

This is because the receiver of the offer can only accept or reject. Since rejecting terminates negotiations without an agreement, she is better off accepting a deal even if it is only slightly more attractive than bargaining breakdown.

We solve games by starting at the end and working our way to the beginning. We call this process backward induction.